Sponsored feature: 2020 – five operational lessons for fund managers

Major events often spark major progress. This year’s pandemic event will live long in the memory, and thoughts are increasingly turning to the new thinking that might follow, says Paul Roberts, CEO of Milestone Group.

Despite the short-term strains, from an operational perspective, the investment management industry has held up remarkably well. Systems have generally performed well under the strain of increased volumes and volatility, and there has not been a wave of breakages that would point to a systemic frailty of technologies. 

Having said this, it has been a period of heightened systemic operational risk, with resilience put to the test in ways not previously contemplated. Forward-thinking firms are looking to capitalise on this unprecedented market dynamic, to use it as a springboard to rethink resilience from a new angle.

1. Prepare for the unexpected
Up to now, firms scanned their environment for changing risks that could affect their business, whether that be physical, operational, technical, political, economic, and more recently cyber-security. These scenarios were used to formulate disaster recovery plans and business continuity plans. 

What Covid-19 has made clear is that consideration needs to be given to a combination of factors that collectively change the risk profile of firms and indeed the industry where these factors affect a wide range of industry players simultaneously. 

For example, we have seen traditional BCP assumptions on how best to move work between sites now being rethought with the pandemic disrupting all locations. In this sense, distributed operating models are no longer seen as a catch-all for resilience planning. 

The mantra must now be to plan for not if but when such a disruptive event occurs. In other words, alongside DR and BCP must sit an operational contingency arrangement or ‘insurance policy’ that can kick in when all else fails.

2. Review the people/automation dynamic
Covid-19 has also heightened the level of systemic risk due to the impact on staff, which is not limited to the workplace. 

Organisations that are heavily offshored in second or third world economies have generally had more adjustments to make than those firms who have retained a significant portion of local labour or who are more automated. The assumption that your staff would be able to access a state-of-the-art primary or secondary location proved incorrect. The advent of mass working from home has put additional stress on staff who live in more crowded environments, in areas with limited or unreliable internet or who simply don’t have access to an employer-provided laptop. Beyond these logistical issues, staff may be distracted by issues relating to health or the loss of friends or relatives. 

The principles that flow from an understanding of operating model design incorporating capacity and resilience planning, are increasingly focused on building resilience into technology rather than relying on people or traditional offshoring approaches. 

3. When it comes to third parties, have a plan B
Asset management is heavily reliant on outsourcing, delegation and inter-group arrangements. These are not problems per se, but it is vital that each firm knows who is ultimately responsible for what. 

Take NAV production as a business-critical example. Consider the situation when you are informed by your fund accounting agent that a NAV will not be available for some reason. This is where the insurance-based model comes into its own.

Where this approach has been adopted, a firm will have established a back-up NAV capability. When required, it takes a computed alternative NAV, puts it into a workflow and applies validations and an authorisation workflow that allows the alternative NAV to be qualified and released to the market as a back-up NAV. The back-up NAV is providing the insurance of being able to disseminate a good NAV that is independent of the cause of the service disruption. Of course, this process also synchronises with the actual NAVs when the accounting agent is back online. 

Forward-thinking firms are building oversight and back-up NAV arrangements into operating models from the start or renewal of an outsourcing deal, which offers protection during transition periods. Though, of course, this does require organisations to accept the possibility of an outage, which can seem somewhat counterintuitive when selecting an outsourced fund accounting agent. 

Outsourcing the function is clearly not equivalent to outsourcing the responsibility. Regulators are making it increasingly clear that they not only expect firms to have in place contingency arrangements for interruptions to outsourced functions, but also that this will be considered an integral part of operating model design, considered with equal weight to internally run processes. This is a much higher and visible level of accountability for outsourced arrangements than has previously been the case. 

4. Compliance doesn’t equal resilience
There has been a clear drive by regulators across the globe to raise awareness and expectations of responsible entities to have contingency arrangements in place in case of interruptions to business-critical outsourced functions. 

While regulators are playing the role of setting out the issues and guardrails, ultimately the answers have to come from within the industry, and senior managers must independently decide on the most suitable resilience plans for their firms. 

In the current climate of uncertainty, intermittent volatility and unexpected events, firms must put measures in place to prepare, rather than simply looking to the regulator for instruction. In this sense, compliance with regulatory guidance needs to be interpreted within the operational context and risk appetite of each investment firm.

5. Consistency is key
This brings us to the important question of how firms best approach maintaining control of operational processes considering that many have diverse and sometimes complex structures with numerous operational units or silos. 

Not all things went well during the Covid-19 experience, and significant adjustments were made under time pressure to achieve the overall resilience achieved across the market. A key learning is that things could have been a lot worse across the board. Many firms have learned of risks throughout their investment process, in supply chains, remote access to systems and related availability and throughput, and staff. It is instructive to review and address these systematically to create a better and stronger business infrastructure for the future. The current pandemic has highlighted the need to automate more processes that involve manual tasks and people-dependent activities where possible.

Covid-19 has clearly demonstrated that operational resilience is not just a buzzword, but a crucial business concern. Companies should not rely upon their successes during the current crisis as an excuse not to learn from the experience and to prioritise enhanced resilience going forward. That would be a missed opportunity to learn from an extraordinary event.

© 2020 funds europe



Innovative US companies are providing some of the solutions to the climate crisis and transition to a more sustainable economy. We see potential opportunities in areas including renewable energy and…
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…


Visit our dedicated Ireland channel for all the latest news and analysis on the country's investment industry.